Russia bailout stokes fears of a systemic banking crisis

The Central Bank of Russia (CBR) said late Tuesday it planned to rescue Otkritie, the country’s seventh-largest bank by assets according to Interfax data, amid concerns about its loan portfolio.

Now that the CBR was looking at ways to improve the insulation of the country’s banking sector, Tim Ash, a strategist at BlueBay Asset Management in London, described the central bank’s “pro-active” yet “painful” bid to clean-up the banking system as a “big plus”.

“The problems at Bank Otkritie are, I think, raising more general concerns as to whether a larger and potentially systemic crisis is brewing in the Russian banking sector,” Tim Ash, a strategist at BlueBay Asset Management in London, said in an emailed research note.

Why now?

Ash said that Russian authorities had known about the underlying structural weakness in the country’s banking system for some time but its central bank had only been jolted into action in 2014. A dramatic slump in oil prices at that time was coupled with tough international sanctions for the annexation of Crimea and Russia’s perceived role in destabilizing eastern Ukraine. Ash said this had put Russian markets under “extreme pressure” and exposed “vulnerability” among its lenders.

Now that the CBR was looking at ways to improve the insulation of the country’s banking sector, Ash described the central bank’s “pro-active” yet “painful” bid to clean-up the banking system as a “big plus”.

“It is notable in my view that the accelerated efforts by the CBR to clean up the Russian banking sector, with large numbers of bank closures already, has not seen noticeable stress across the broader banking sector,” he concluded.

Questionable business practices

Andrei Makhonin | Contributor

A branch of Otkritie Bank, one of Russia’s biggest private lenders, in central Moscow.

Some of Otkritie’s shareholders are connected to major state entities, a fact that prompted some analysts to believe it was too big and influential to be allowed to fail.

The central bank did not say how much it was spending on the bailout, but said it planned to take a minimum 75 percent stake after evaluating Otkritie’s financial position. Until now, the biggest banking bailout in Russia was a 395 billion ruble ($6.7 billion) rescue of the Bank of Moscow in 2011, Russia’s fifth-biggest lender by assets at the time.

Otkritie Bank, part of the wider Otkritie Group, grew rapidly in recent years, snapping up banks such as Nomos, non-pension funds and insurers, and even the diamond business of Russian oil producer Lukoil.

But Dmitry Tulin, the central bank’s first deputy chairman, told a news briefing that its business practices had been questionable.

When asked whether market participants should be concerned about the news regarding a planned Otkritie bailout package, Gina Sanchez, CEO of Chantico Global, said that while Russia’s banking sector had not necessarily been a primary focus to date, this had been a “very important” development.

“We are talking about a potential systemic bank failure,” she told CNBC Wednesday.